When an asset is transferred via sale or at death, one of the critical (and often misunderstood) questions is, “how is the asset titled?” There are three general ways individuals hold assets: in their own name, via contract, and by operation of law. Analyzing the manner in which assets are held, and the implications of these ownership types, is a cornerstone of financial and estate planning for the transfer of assets to the next generation.
Checking and savings accounts are examples of assets commonly held in an individual’s own name, where the title on the account reads something like, “the John Smith checking account.” Other items that are commonly held in an individual’s own name include furniture, furnishings, collectibles, and automobiles. Items held in an individual’s own name will transfer at death via the individual’s Last Will, and will do so through the local probate court.
IRAs, life insurance, and workplace-sponsored retirement plans are commonly owned assets that transfer via contract when a person dies. The “contract” entered into by the individual is essentially a promise by the insurance company or retirement plan, which has promised to pay the proceeds to the individual’s named beneficiaries. Trusts are another popular form of contractual ownership, where the contract in question is the trust document itself. Finally, many financial service providers will allow for a Transfer on Death (“TOD”) designation, which allows an individually held account to be transferred directly to the named beneficiary without going through probate.
The family home is a common example of an asset that is owned by operation of law. In this manner of ownership, the interests are held jointly (often between spouses), and upon the death of one owner, the interest transfers to the other owner immediately, regardless of what the individual’s Last Will may say. Non-spouses may be joint owners of property as well; however, there are differences in the ownership rules for spouses versus those for non-spouses.
There are several ways an individual can change the form of ownership and a variety of reasons he or she may want to do so. Some people choose to place assets in trust in order to protect beneficiaries from themselves and from the outside world. Others may want to transfer ownership of a rental property into an entity in order to shield their assets from potential liability arising from the rental property. In many cases the different tax rules make it more efficient to hold assets in one manner versus another.
At Arnerich Massena, we examine the ownership of all of our clients’ different assets during the financial planning process by coordinating with their legal and tax teams. We can then help our clients make informed decisions about whatever life throws at them.